No one is likely to accuse the Securities and Exchange Commission of acting hastily in 2014. Nearly four years after passage of the Dodd-Frank Act, little more than half of its required rulemakings are final. The Commission’s regulatory agenda for the coming year is mostly a backlog of lingering proposals.
2015 should prove to a busy year for compensation consultants as the SEC, after numerous delays, is finally poised to issue final rules pertaining to clawbacks, pay versus performance, and above all, a pay-ratio rule. In recent comments, SEC Chairman Mary Jo White has reiterated that the Commission is now focused on rulemaking pertaining to executive compensation. Although those rules were intended to go public in 2014, they have been pushed into latter 2015.
Rules in the offing include: requiring shareholder advisory votes on golden parachutes for departing executives; disclosure about the role of compensation consultants in developing pay plans and potential conflicts; rules regarding the disclosure of hedging by employees and directors; and rules directing exchanges to prohibit the listing of securities for issuers that have not implemented compensation clawback policies.
The most contentious is the pay-ratio rule. Although the Commission did develop a proposal that would require companies to disclose a comparison of CEO pay to that of the median worker, the final rule, bogged down by controversy and comment letters, has yet to emerge. Meanwhile, according to research by compensation consultant Equilar, “a handful of companies have begun including similar ratios within proxy statements,” bowing to both shareholder pressure and a sense of the inevitable.
Over a course of decades, the SEC has frequently embarked on a mission to overhaul its disclosure regime; 2015 could be the year that goal comes closer to reality.
“There are going to be changes to the Dodd-Frank Act to alleviate some of the burdens.”
Michael Borden, Counsel, Sidley Austin
White has frequently promoted the project as a priority, and plenty of work is underway. “New User Guides” (industry- and sector-specific disclosure guidelines that haven’t been properly updated since the 1980s) may be the first tangible results of that labor in 2015 if all goes according to plan.
What About Congress?
A Republican majority in both chambers could influence the future of Dodd-Frank rulemaking. For an omen of things to come, look no further than the federal spending battle that closed out the 113th Congress. Compromises between Republicans and Democrats led to agreement on the fiscal year 2015 omnibus appropriations bill that led to repeals of Dodd-Frank provisions related to banks’ derivatives trading, and that opened the door to cuts in pension benefits under multi-employer plans.
Because the bill had bipartisan support (and is now law), it suggests that some otherwise gun-shy Democrats are willing to support Dodd-Frank fixes and changes. The episode also challenges conventional wisdom that President Obama would, and could, veto any rollback of Dodd-Frank reforms.
“There are going to be changes to the Dodd-Frank Act to alleviate some of the burdens,” says Michael Borden, counsel at the law firm Sidley Austin and former senior counsel with the House Financial Services Committee. Both parties have “pent up ideas and energy, want to get stuff done, and will be forced to cooperate.”
The Consumer Financial Protection Bureau, a longtime target of Republican ire, will wear a bull’s-eye into 2015. Congress will likely re-introduce legislation to subject the CFPB to the annual congressional appropriations process, says Justin Schardin, associate director of the Bipartisan Policy Center’s Financial Regulatory Reform Initiative. A bolder move would be to replace the current CFPB structure of a single director with a board nominated by the president and confirmed by the Senate.
In 2015, bank regulators are expected to make good on promises to offer Volcker Rule relief to smaller banks and credit unions. Regulators and members of Congress alike have also voiced concerns about the $50 billion asset threshold established for designations of Systematically Important Financial Institutions (SIFIs). Critics say this dividing line, which triggers enhanced compliance standards and increased capital requirements, is arbitrary and additional criteria are warranted. No less than Federal Reserve Governor Daniel Tarullo and Federal Reserve Chair Janet Yellen have urged that it be reconsidered in 2015.
“It doesn’t make sense that if you are a $49 billion bank and you buy a couple of branches across the river, then all of a sudden you are automatically systemically important,” Schardin says. “There has to be more to it than that.”
Downloads and Downfalls
Privacy has long been a concern for regulators, and the year ahead will see that focus shift to the use of location data by apps and online services, says Fernando Bohorquez, a partner at law firm Baker Hostetler. “The FTC has made it clear that it considers geolocation data as sensitive information that deserves a greater level of protection,” he says. “Other regulators are looking into location-based services as well; this issue is definitely on their radar.”
As 2014 wound down, companies were finding themselves in hot water over this particular breed of privacy abuse. Snapchat, a mobile messaging app, agreed to settle Federal Trade Commission charges that it deceived consumers over the amount of personal data it collected and security measures to protect it. It entered into a 20-year consent order for meeting privacy guidelines. More recently, ride-sharing service Uber came under scrutiny for its use of location tracking to compile potentially invasive customer data.
The Location Privacy Protection Act, authored by Sen. Al Franken (D-Minn.) and co-sponsored by Sens. Chris Coons (D-Del.) and Elizabeth Warren (D-Mass.), expired last year but is expected to be refilled in 2015. It would require companies that collect the location of more than 1,000 devices to post online what is collected, shared, and used. “I don’t know the odds of that bill getting through committee, but I definitely think there will at least be Senate hearings in the coming year,” Bohorquez says.
WHAT’S IN STORE FOR THE SEC?
The following is a selection from the Securities and Exchange Commission’s regulatory agenda for the coming months, as submitted to the federal Office of Management and Budget.
Concept Release on Possible Revisions to Audit Committee Disclosures (pre-rule stage)
Compensation Clawbacks (Pre-rule Stage)
Pay Versus Performance (Proposed Rule Stage)
Implementation of Title I of the JOBS Act (Proposed Rule Stage)
Implementation of Titles V and VI of the JOBS Act (Proposed Rule Stage)
Registration of Security-Based Swaps (Proposed Rule Stage)
Disclosure of Hedging by Employees, Officers and Directors (Proposed Rule Stage)
Disclosure of Payments by Resource Extraction Issuers (Proposed Rule Stage)
Amendments to Interactive Data (XBRL) Program (Proposed Rule Stage)
Stress Testing for Large Asset Managers and Large Investment Companies (Proposed Rule Stage)
Recordkeeping and Risk Controls Specific to Algorithmic Trading (Proposed Rule Stage)
Credit Rating Agencies--Conflicts of Interest (Proposed Rule Stage)
Credit Risk Retention (Final Rule Stage)
Rules Governing the Offer and Sale of Securities Through Crowdfunding (Final Rule Stage)
Amendments to Regulation D, Form D, and Rule 156 (Final Rule Stage)
Pay Ratio Disclosure (Final Rule Stage)
Reporting of Proxy Votes on Executive Compensation (Final Rule Stage)
Prohibition Against Fraud, Manipulation, and Deception in Connection With Security-Based Swaps (Final Rule Stage)
Prohibition Against Conflicts of Interest Relating to Certain Securitizations (Final Rule Stage)
Business Conduct Standards for Security-Based Swap Dealers (Final Rule Stage)
Regulation Systems Compliance and Integrity (Final Rule Stage)
And of course, cyber-attacks will likely be even more ubiquitous this year, meaning more pressure on companies to manage that risk. “Threat intelligence is the newest front in what amounts to an arms race,” says Richard Plansky, executive director for consulting firm K2 Intelligence. “By gathering specific information from deep and dark Web sources, forward-thinking companies will give themselves the best chance of being ready for the specific attacks that are coming their way.”
The Big Picture
No matter which predictions about regulation and legislation come true, compliance officers can count on the SEC and other regulators to place an even greater focus on internal controls in the year ahead, says Russ Berland, head of the compliance practice at law firm Stinson Leonard Street. “They need to wake up and figure out that the SEC is looking for them to implement true internal controls that complement and enforce the compliance program,” he says. “Compliance people are not used to thinking about internal controls and COSO and such … yet that’s the space that the SEC is insisting that we drive our efforts.”
From securities fraud to Regulation Fair Disclosure to the Foreign Corrupt Practices Act, the SEC will increasingly ask companies to prove they have effective internal controls and a compliance program that meets the best practices laid out in the U.S. Sentencing Guidelines. Unto itself that isn’t anything new, Berland says, but he expects to see the SEC continue to hammer away at the message in 2015.
“If someone wants to get treated well by the SEC, they need to demonstrate that those internal controls are in place when the event happened,” he says.